Risk assessment

Recession is expected to continue in 2016

Despite a moderation of GDP contraction in the first quarter 2016 compared to the previous quarters, the outlook for the Brazilian economy seems grim. Internally, household consumption, the main growth driver, should still suffer from the high cost of credit, lower real wages due to the still high inflation and the rise in unemployment rate (around 11% in April 2016).

The rise in unemployment also affects the bank credit supply: the banking sector, exposed to household debt, is expected to face an increase in non-performing loans which contributes to reduce the supply of credit. Private and public investment should continue to contract due to the weakness of domestic demand and the pursuit of a fiscal austerity policy. Foreign trade would be affected by the slowdown in Chinese demand and its impact on prices of minerals. Export competitiveness should still be affected by weak transport infrastructure and rigid labor regulations, despite the gains related to the continued depreciation of the real against the dollar. Finally, inflation should decline in line with the weakness of domestic demand. It should nevertheless remain above the target set by the central bank (4.5%) due to the depreciation of the Brazilian currency. Rising unemployment and slowing consumer prices should lead to the easing of monetary policy towards the end of 2016.

A primary deficit higher than expected in 2016

The adjustments to fiscal policy begun in 2015, shortly after the re-election of President Dilma Rousseff, are having trouble achieving their aims: inflation and public deficit have continued to rise. The lack of a majority in Congress and the recession have impacted the adjustment in public finances, which in turn led to the decision by three rating agencies to downgrade the country to speculative grade.

The new interim government that took office in May 2016 has already announced a higher than expected primary deficit estimated at nearly 72 billion BRL, or 2.8% of GDP. This increase is explained mainly by the lower tax revenues expected during this year, but also by the release of deferred payments under various programs funded by the federal state. The new government is now working on a fiscal adjustment plan that should be subject to the approval of Congress before next summer. Proposals such as the reform of the social security system or the tax increases are considered. A widening budget deficit should result in worrying public debt dynamic which could reach 73.4% of GDP in 2016 from 66.5% of GDP in 2015 according to the government.

Improvement in the current account deficit driven by lower imports

In 2016, the current account deficit is expected to improve thanks to weaker imports on the back of slower private consumption and investment, as well as the depreciation of the Brazilian real which made imports more costly. On the other hand, depreciation of the local currency would also help to boost export competitiveness but exports will continue to be hit by low commodity prices. Trade in services and income balance (tourism. dividends. interest) will also remain in deficit.

The challenges of the Michel Temer’s new administration

In May 2016, Brazilian Senate voted in favour of the opening of the impeachment’s proceedings against the President Dilma Roussef with 55 votes in favour, 14 more votes than the majority required. This is her Vice President Michel Temer, which now assumes the role of interim president, while waiting the final decision of the Senate that should be held in August 2016. Barring unforeseen circumstances, two thirds of the votes in the Senate necessary for revoking definitely the President should be achieved. Michel Temer is expected to remain in power until the next elections in 2018, but he will face to several challenges, including ensuring political stability due to his lack of legitimacy (he was not elected democratically). The success of his government will mainly depend on its ability to pass economic reforms to bring the country out of the crisis and to restore credibility.

Last update: June 2016

Payment

Bills of exchange (letra de câmbio) and, to a lesser extent, promissory notes (nota promissória) are especially used in local commercial transactions. The validity of either instrument requires a degree of formalism in their issuance.

The use of cheques is relatively commonplace – often post-dated in practice and thus transformed into credit payment instruments – and their issuance requires comparable formalism.

Although the use of the above credit payment instruments for international settlements is not advisable, they nonetheless represent, in case of default, an effective means of pressure constituting an extra-legal enforcement title that affords creditors with privileged access to enforcement proceedings.

Theduplicata mercantil, a specific payment instrument, is a copy of the original invoice presented by the supplier to the customer within a 30 days time for acceptance and signature and then can circulate as an enforceable credit instrument.

Bank transfers, sometimes guaranteed by a standby letter of credit, are also commonly used for payments in domestic and foreign transactions, offering relatively flexible settlement processing particularly via the SWIFT electronic network to which major Brazilian banks are connected.

For moving large sums, various highly automated interbank transfer systems are available like, since April 2002, the STR real time Interbank Fund Transfer System (Sistema de Transferência de Reservas) managed by Banco Central do Brasil or the RSFN / National Financial System Network (Rede do Sistema Financeiro Nacional) linking various financial operators in Brazil in real time.

Debt collection

Out-of-court settlement begins with telephone contacts followed up as necessary with a final demand by recorded delivery letter requesting debtor to pay the outstanding principal, increased by past-due interest stipulated in the transaction agreement. Absent an interest-rate clause, the civil code stipulates use of the penalty interest rate imposed on tax payments, which is one per cent per month past due.

Considering the slow pace and the cost of legal proceedings, it is always advisable to negotiate directly with delinquent customers where possible and attempt to settle on amicable basis, taking into consideration that a repayment plan may last for a two years period. If the negotiation in amicable basis was not successful, the debt can be claimed in Court.

The legal system comprises two types of jurisdiction the first of which is at the State level.

Each Brazilian State has its own courts – there are 26 States, plus theDistrito Federalof Brasilia – notably including a Court of Justice (Tribunal de Justiça) whose judgments can be appealed at the Federal level. Legal costs vary from State to State.

The second type of jurisdiction involves the Federal Courts. There are five regional Federal Courts (Tribunais Regionais Federais / TRF), each with its own geographic competence encompassing several States. The five TRF are located respectively in Brasilia (região 1), Rio de Janeiro (região 2), São Paulo (região 3), Porto Alegre (região 4), and Recife (região 5).

For recourse on no-constitutional questions, TRF judgments can be appealed to the highest court of law, the Superior Tribunal de Justiça / STJ that sits inBrasilia.

Brazilian law provides a wide range of legal measures to be used in defense of the rights of creditor against debtor. Six collection legal procedures are most commonly used:Processo de Execução(which is our main Enforcement Proceeding),Ação Monitória(which is a hybrid of an Enforcement Proceeding and a Standard Lawsuit),Ação Ordinária de Cobrança(Standard Lawsuit),Reintegração de Posse de Bem com Reserva de Domínio(Enforcement of a Retention of Title),Pedido de Falência(Bankruptcy Request) andCautelar de Arresto(which is a Preemptive Seizure of Assets).

The enforcement of an extrajudicial instrument is a legal type of enforcement granted to the creditor in order to allow him to claim his rights against the debtor and is the most direct and effective in courtvehicle to recover credits in Brazil, and does not require prior guarantees from foreign creditors.

Brazilian legislation moreover makes some documents enforceable, that are separated in two main categories :

– legal enforcement titles including judgments made by a local court recognizing the existence of a contractual obligation, court-approved conciliations, arbitral awards, and foreign judgments covered by anexequatur,

– extra-legal enforcement titles : bills of exchange, promissory notes,duplicata mercantil, cheques, official documents signed by the debtor, private agreements signed by debtor, creditor and two witnesses (obligatory), secured agreements, and so on.

The estimated duration of the proceeding is in average 1 year in the main States to reach a judgement on the matter.

The ação monitória is a special procedure that can be filed by any creditor with written proof of debtor's obligation that is not enforceable.The difference between this procedure and the Enforcement Proceeding is in the legal requirements and in the possibility of questioning the merit of the obligational relationship by the debtor in the course of the suit. Theação monitória is less speedy than a regular Enforcement Proceeding because if debtor presents an objection in the Court, the merits of the commercial relation will be thoroughly discussed in the same fashion of a Standard Lawsuit.

The estimated period of this lawsuit is on average 2 years.

Ordinary proceedings, presided over by an interrogating judge (inquisitorial procedure), are often formalist, because on this lawsuit will be done a scrupulous examination of evidence submitted by each party in conjunction with study of any expert reports ; finally, the main hearing during which the respective parties are heard and after this the judgment will be made by the court. It takes two to three years to obtain an enforceable judgment in first instance.

Enforcement of a Retention of Title It is a special procedure based on the retention of title of a movable non-fungible asset, which remains until the agreed price is fully paid.

Bankruptcy Request (Chapter 7) - is a procedure that may ultimately be used as a way to pressure the debtor to execute an agreement, However, it cannot be overlooked, because it is one of the main courses of action in credit recovering.

The Precautionary Seizure represents a lien on the debtor's assets. Its purpose is to protect the assets from fraud against creditors or squandering promoted by the debtor.

The article 835 of the CPC establishes that, except in enforcement proceedings based on extrajudicial

enforceable instruments, the plaintiff, national or foreign, who resides abroad or leave Brazil during the course of the lawsuit, has to provide a bond in court with a security sufficient to pay the judicial expenses and the attorney's fees of the opposing party, unless it possesses real estate in Brazil in a value that ensures such payments. The purpose of this legal requirement is to protect any possible harm to the defendant or to the court in the case of defeat of the foreign plaintiff abroad, since, if it worked otherwise, it would create a costly obligation to start a collection abroad against the plaintiff for the judicial expenses or the Defeat fees. The value of the bond is up to 20% of the claim value, but it is usually smaller in collections of higher value (between 5% and 15%). The security can be provided either by the plaintiff or by a third party on its behalf.